What Types of Investments Should You Be Familiar With?

What Types of Investments Should You Be Familiar With?

The website Investopedia lists 20 different types of investments you could make, though all are certainly not necessary in order to create financial independence. The problem in this world is that too many of us think we know something when all we really have is a loose grasp on the topic. The following information should be handy for the beginning investor trying to decide whether to plow his money into one (or more) of three of the most popular options.

Stock
Stock is sometimes referred to as shares, securities or equity. Simply put, common stock is ownership in part of a company. For every stock you own in a company, you own a small piece of the office furniture, company cars, and even that lunch the boss paid for with the company credit card. More importantly, you are entitled to a portion of the company’s profits and any voting rights attached to the stock. With some companies, the profits are typically paid out in dividends. The more shares you own, the larger the portion of the company (and profits) you own.

Common stock is just that, “common”. The majority of stocks trading today are in this form. Common stock represents ownership in a company and a portion of profits (dividends). Investors also have voting rights (one vote per share) to elect the board members who oversee the major decisions made by management. In the long term, common stock, by means of capital growth, yield higher rewards than other forms of investment securities. This higher return comes at a cost, as common stock entails the most risk. Should a company go bankrupt and liquidate, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.

How to Buy or Sell It
The most common method for buying stocks is to use a brokerage, either full service or discount. There is no minimum investment for most stocks (other than the price per share), but many brokerages require clients to have at least $500 to open an account. Dividend reinvestment plans (Drips) and direct investment plans (DIPs) are two ways individual companies allow shareholders to purchase stock directly from them for a minimal cost. DRIPs are also a great way to invest money at regular intervals.

Strengths
Common stock is very easy to buy and sell. Thanks in large part to the growth of the Internet, it is very easy to find reliable information on public companies, making analysis possible. There are over 11,000 public companies in North America to choose from.

Weaknesses
Your original investment is not guaranteed. There is always the risk that the stock you invest in will decline in value, and you may lose your entire principal. Your stock is only as good as the company in which you invest – a poor company means poor stock performance.

Three Main Uses
Capital Appreciation
Income
Liquidity

Mutual Funds
Are you someone who wants to invest (or already does), but doesn’t want to bother deciphering a company’s numbers and deciding whether or not the stock is a good buy? Or are you someone who finds the risk and volatility of the stock market stomach-turning? If this describes your personality, you are a prime candidate for mutual funds. A mutual fund is simply a large group of people who lump their money together and give it to a management company to invest it on their behalf. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own a part of the overall fund.

Strengths
No matter how much you invest, you get to own several companies. In other words, you get instant diversification. You can easily make monthly contributions. Your money is being managed by a professional manager. Because of his/her experience and knowledge, you should receive above average returns, at least in theory.

Weaknesses
The majority of mutual fund companies don’t come close to beating market averages like the S&P 500 and the DJIA. (Notice we said you will receive above average returns “in theory”. This will be discussed in detail in future pages.) Fund managers take a slice of the profits for their work. This slice varies, but it can be quite high. You pay management fees whether the fund actually makes you money or not.

Three Main Uses
Capital Appreciation
Provides Income
Tax-Deferred Savings

Real Estate
Usually, the first thing you look at when you purchase a home is the design and the layout. But if you look at the house as an investment, it could prove very lucrative years down the road. For the majority of us, buying a home will be the largest single investment we make in our lifetime. Real estate investing doesn’t just mean purchasing a house – it can include vacation homes, commercial properties, land (both developed and undeveloped), condominiums and many other possibilities.

When buying property for the purpose of investing, the most important factor to consider is the location. Unlike other investments, real estate is dramatically affected by the condition of the immediate area surrounding the property and other

local factors. Several factors need to be considered when assessing the value of real estate. This includes the age and condition of the home, improvements that have been made, recent sales in the neighborhood, changes to zoning regulations, etc. You have to look at the potential income a house can produce and how it compares to other houses in the area.

How To Buy or Sell It
Real estate is almost exclusively bought through real estate agents or brokers. Their compensation usually is a percentage of the purchase price of the property. Real estate can also be purchased directly from the owner, without the assistance of a third party. If you find buying property too expensive, then consider investing in real estate investment trusts (REITs).

Strengths
Whether your objective is income or capital appreciation, real estate investing can help you achieve your goal. Mortgages allow you to borrow against the property up to three times the value. This can dramatically increase an investor’s leverage. Remember that you typically need a 5% down payment first.

Weaknesses
Selling property quickly can be difficult. There are significant holding costs, especially if you are not residing in the property. Examples include property taxes, insurance, maintenance, etc.

Three Main Uses
Provides Income
Capital Appreciation
Leverage

At Young Wealth, we strongly suggest that you focus your efforts on real estate investing. This is traditionally where American millionaires come from and there is no reason to think anything is set to change that. One thing we should also point out in regard to down payments. A few paragraphs back we referred to the fact that you will likely have to put 5% of the purchase price down as good faith in order to secure a loan.
The bad news is that was in the good old days about five years ago. With the crash of the housing market, powered by bank failures and massive foreclosures, few lending institutions will offer to write a mortgage on a property unless you are able to put down 20% to 25% in cash. This can be quite a chunk of change for the new investor but, on a positive note, there hasn’t been a buyer’s market like this in decades.

The Young Wealth Team

 

 

 

 

 

Flickr / ilovememphis

Some of the particular for the preceding article drawn from Investopedia.com

The Young Wealth Team

The Young Wealth Team

The Young Wealth Team

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